Dr. Tabrez Ahmad Professor of Law technolexindia.blogspot.com corpolexindia.blogspot.



 The Biggest Fraud is to cheat oneself  Rather fail with honor than succeed by Fraud.

 For the most part Fraud in the end secures for its

companions repentance and shame

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


 In the broadest sense, a fraud is an intentional

deception made for personal gain or to damage another person/entity  Wrongful or criminal deception intended to result in financial or personal gain  Fraud ( Civil Law violations- Criminal law)

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


Indian Law
          

Indian Contract Act, 1872 Section 17 of the Act defines “Fraud”as "Fraud" means and include any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto his agent, or to induce him to enter into a contract. the suggestion as a fact, of that which is not true, by one who does not believe it to be true; the active concealment of a fact by one having knowledge or belief of the fact; a promise made without any intention of performing it; any other act fitted to deceive; any such act or omission as the law specially declares to be fraudulent.

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


Indian Law .. Contd.
Indian Penal Code, 1860 Section 25 of IPC defines "Fraudulently "as: A person is said to do a thing fraudulently if he does that thing with intent to defraud but not otherwise

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


Regulatory Legislations INDIA Anti Fraud Legislations/Regulations/Guidance Examples
 Indian Contract Act 1872  ►Indian Penal Code  ►Prevention of    

 ►Sarbanes Oxley Act  ►Foreign Corrupt

Corruption Act ►Prevention of Money Laundering Act ►The Companies Act 1956 ►Clause 49 of Listing Agreement ►CARO 2003

Practices Act  ►Patriot Act  ►OECD Guidelines  ►IIA Guidance

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 Increase in regulators/stakeholders expectation

from Management & Auditors towards Prevention, Detection, Investigation & Reporting of Fraud

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


Types of Fraud
 Fraudulent Financial    The common element

 

Statements Employee Fraud Vendor Fraud Customer Fraud Investment Scams Bankruptcy Frauds Miscellaneous

is deceit or trickery!

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


Financial Statement Fraud
 East India Company Fraud  Mudhra Scam

 Harshad Mehta Scam
 Enron Fiasco  Lehman Brothers  Satyam –Enron of India  Shara’s Case

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


East India Company Fraud
 Fraudulent Financial reporting and corrupt business

practices having its existence since the era of footprints of Public corporation.  It was the first multinational corporation in the world and the first company to issue stock.  In the late 1700s Edmund Burke had Robert Clive, “the founder of the empire”and Warren Hastings, India’s Governor-General, brought up on impeachment charges laden with corruption issues. Though the trials failed to convict anybody.  The Company was subsequently wound up under the East India Company Stock Redemption Act, 1874.
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Mundhra Scam-First Scam of Independent India
 First successful trial of a financial scandal in Independent    

India. Haridas Mundhra,a industrialist & stock speculator sold fictitious shares to LIC and thereby defrauding LIC by Rs. 125 crores. Mr. Jawahar Lal Nehru, set up a one-man commission headed by Justice Chagla to investigate. Justice Chagla concluded the matter; Haridas was found guilty and was sentenced to imprisonment for 22 years. T.T. Krishnamachari, the then Finance Minister, resigned from his position.
Dr. Tabez Ahmad, http://corplexindia.blogspot.in


Enron Fiasco
 February 2000 Fortune magazine chooses Enron
   

as it’s “Best Managed and Most Innovative company” August 2000: Stock at $73 billion March 2001: FY2000 revenues at $100 billion Sep 16, 2001: “Buy more shares” October 2001: Enron pays its regular dividend

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


 October 16, 2001$618 million 3rdQtr Loss$1.2
  

billion reduction in shareholder equity October 31, 2001SEC upgrades inquiry into a formal investigation December 2, 2001Enron files for bankruptcy4,000 employees fired 20,000 workers lose their jobs $73 billion in stock value -gone

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Enron -Reactions
Enron Wasn’t Just Enron  Enron Corporation  Arthur Andersen  Enron’s Law firm  Investment bankers  Countries with Enron operations Argentina, Mozambique, India, Poland  Companies in other countries Shell, BP, Mobil

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


Reasons behind Enron Fiasco
 Enron Senior Management used complex and murky      

accounting schemes to reduce Enron’s tax payments; to inflate Enron’s income and profits; to inflate Enron’s stock price and credit rating; to hide losses in off-balance-sheet subsidiaries; to engineer off-balance-sheet schemes to funnel money to themselves, friends, and family; to fraudulently misrepresent Enron’s financial condition in public reports
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 16

Satyam –Enron of India
 The biggest corporate scam in India has come from        

one of the respected business family. Satyam -Fourth largest Indian IT Company listed in India & US. Over US $ 2 billion annual revenue size co. Established in mid 1980s, grown to 53,000 employees 600 plus customers including 185 fortune 500 Cos Operations in 66 countries across the globe Financial advisor: Merrill Lynch (now Bank of America) Auditors: Price Water House Coopers Bankers: Citi bank; BNP Paribas, HSBC & HDFC
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 17

Confession –January 7th, 2009
 2009 Mr. Ramalinga Raju resigned as Chairman

from Satyam after admitting to cooking up the account books.

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


Cause behind Satyam
 Fudging of Accounts.
 Over stated Assets of Rs. 490 crore.  Fake cash balances over Rs. 5,000 crore in the Balance

Sheet.  Interest component of Rs. 376 crore which never flowed into the company’s coffers.  Understated Liabilities of Rs. 1,230 crore.

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Aftermath Effect
 Investors-Panicked as Stock plummeted.  Employees -stranded in many ways-morally, financially,
   

legally and socially. The incident resulted in immeasurable and unjustifiable damage to Brand India and Brand IT in particular. Chairman, MD and CEO, CFO, Key associates arrested. Partners of Audit Firm were also arrested. People lost a staggering Rs 100 billion in Satyam in market capitalisation as investors reacted sharply and dumped shares, pushing down the scrip by 78 per cent to Rs. 39.95 on BSE.
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 20

Harshad Mehta –What happened
 Mehta obtained fake Bank Receipts from small banks.  The said Bank Receipts were further passed on to other
  

banks as security to obtain cash. This money was used to drive up the prices of stocks in the stock market. Bubble of stock market manipulation and fake BRs busted. Drastically impacted the Stock Market, Economy and progress of the Country. Banking system was swindled of a whopping of Rs. 4,000 crore. Even, the Chairman of one of the Bank committed suicide
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 21

Sahara India Real Estate Corp. Ltd & Others V. SEBI and Another 31st August, 2012, Supreme Court of India

Confirmed the jurisdiction and power of SEBI to enquire into hybrid securities issued by unlisted public Ltd. Companies in the name of private placement when offered to more than 50 persons.

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Brief Facts of Sahara Case
 On January 4, 2010, Roshan Lal, a resident of Indore, sent a

note, written in Hindi, to the National Housing Bank, requesting it to look into housing bonds issued by two companies of the Lucknow-headquartered Sahara group, Sahara India Real Estate Corporation and Sahara Housing Investment Corporation. Being a chartered accountant, Lal wrote in the small note, he found that the bonds, bought by a large number of investors, were not issued according to the rules. The National Housing Bank did not have the wherewithal to investigate the allegation, so it forwarded the letter to the Securities and Exchange Board of India, or Sebi, the capital markets regulator. That note set in motion a chain of events that resulted in the Supreme Court ordering the two companies on August 31 to return the money they had raised through the bonds — Rs 24,029 crore — to the 29.6 million investors, along with interest (15 per cent per annum).
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 23

 Sahara India Real Estate Corporation Ltd. ( SIRECL) and

  

Sahara Housing Investment Corporation Ltd. (SHICL) filed an appeal before Supreme Court being aggrieved by the order of Securities Appellate Tribunal (SAT) . In this appeal SC was required to decide the following legal issues. Whether OGCD ( Optionally Fully convertible Debentures) issued by the Appellant are securities within the meaning of Sec 2(h) of SEBI Act? Whether SEBI has jurisdiction u/s 55A(b) of the Companies Act 1956 to call for information and investigate matters relating issue and transfer of OFCSs offered by Appellant to more than 50 persons ? Whether the Appellant has committed any violations of sections of companies Act relating to issue of prospects , misstatement in prospectus and criminal liability and penalties for violations ?

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


SEBI’s Stand
 SEBI on the basis of complaint, issued a notice to SAHARA

and called for information on OFCDs issued by SAHARA. SAHARA refused to give information on the grand that SEBI had no locus standi to call for such information.  SEBI had to issue summons calling for information as interest of investors was involved.  Ministry of Corporate Affairs ( MCA) had also called for information and informed SEBI that it fond compliance in respect of certain queries but advised SAHARA’s to file prospectus as per Sec 60B(9) of the Companies Act 1956

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


 SEBI issued a show case notice alleging that instances

of OFCD was public issue as it involved more than 50 persons and , therefore , securities were liable to be listed on a recognized stock exchange under Sec. 73 of the Companies Act, 1956.  It is also required to comply with various clauses of DIP guidelines and violated regulations 4(2), 5(1), 6, 7, 16(1), 20(1), 25, 26, 36, 37, 46 and 57, of Securities Exchange Board of India ( Issue of Capital and Disclosure requirements) Regulations, 2009( ICDR 2009)
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 26

SAHARA’s Stand
SAHARA replied to show cause notice stating that SEBI has no jurisdiction. It defended its action by stating that: 1. Hybrid Securities are not defined in in SEBI Act or Securities Contract Regulation Act 1956 2. Issuance of Hybrid Securities in terms of 60B (Information Memorandum) and only Central Govt. had jurisdiction u/s 55A(c) of Companies Act 1956 3. Funds are raised by private placement with friends, associates and group companies as such provisions of Section 67 and 73 are not applicable 4. Red Herring prospectus was registered with ROC Kanpur
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 27

Supreme Court’s Judgment
 1. Saharas ( SIRECL & SHICL ) would refund the amounts

collected through RHPs dated 13.3.2008 and 16.10. 2009 along with interest @ 15 % per annum to SEBI from the date of receipt of the subscription amount till the date of repayment , within a period of 3 months from the date of judgment , which shall be deposited in a nationalized bank bearing maximum rate f interest.  2. Saharas are also directed to furnish the details with supporting documents to establish whether they had refunded any amount to the persons who had subscribed through RHPs  dated 13.3.2008 and 16.10.2009 within a period of 10 (ten) days from the pronouncement of this order and it is for the SEBI (WTM) to examine the correctness of the details furnished.
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 28

 3. The court made it clear that if the documents produced

by Saharas are not found genuine or acceptable, then the SEBI (WTM) would proceed as if the Saharas had not refunded any amount to the real and genuine subscribers who had invested money through RHPs dated 13.3.2008 and 16.10.2009.  4. Saharas are directed to furnish all documents in their custody, particularly, the application forms submitted by subscribers, the approval and allotment of bonds and all other documents to SEBI so as to enable it to ascertain the genuineness of the subscribers as well as the amounts deposited, within a period of 10 (ten) days from the date of pronouncement of this order.
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 29

 5. SEBI (WTM) shall have the liberty to engage

Investigating Officers, experts in Finance and Accounts and other supporting staff to carry out directions and the expenses for the same will be borne by Saharas and be paid to SEBI.  6. SEBI (WTM) shall take steps with the aid and assistance of Investigating Authorities/Experts in Finance and Accounts and other supporting staff to examine the documents produced by Saharas so as to ascertain their genuineness and after having  ascertained the same, they shall identify subscribers who had invested the money on the basis of RHPs dated 13.3.2008 and 16.10.2009 and refund the amount to them with interest on their production of relevant documents evidencing payments and after counter checking the records produced by Saharas.
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 30

 7. SEBI (WTM), in the event of finding that the

genuineness of the subscribers is doubtful, an opportunity shall be afforded to Saharas to satisfactorily establish the same as being legitimate and valid. It shall be open to the Saharas, in such an eventuality to associate the concerned subscribers to establish their claims. The decision of SEBI (WTM) in this behalf will be final and binding on Saharas as well as the subscribers.  8. SEBI (WTM) if, after the verification of the details furnished, is unable to find out the whereabouts of all or any of the subscribers, then the amount collected from such subscribers will be appropriated to the Government of India.
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 31

 9. The court also appointed Mr. Justice B.N. Agrawal, a

retired Judge of this Court to oversee whether directions issued by this Court are properly and effectively complied with by the SEBI (WTM) from the date of this order. Mr. Justice B.N. Agrawal would also oversee the entire steps adopted by SEBI (WTM) and other officials for the effective and proper implementation of the directions issued by this Court. We fix an amount of Rs.5 lakhs towards the monthly remuneration payable to Mr. Justice B.N. Agrawal, this will be in addition to travelling, accommodation and other expenses, commensurate with the status of the office held by Justice B.N. Agrawal, which shall be borne by SEBI and recoverable from Saharas. Mr. Justice B.N. Agrawal is requested to take up this assignment without affecting his other engagements. We also order that all administrative expenses including the payment to the additional staff and experts, etc. would be borne by Saharas.
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 32

 10. We also make it clear that if Saharas fail to comply

with these directions and do not effect refund of money as directed, SEBI can take recourse to all legal remedies, including attachment and sale of properties, freezing of bank accounts etc. for realizations of the amounts.  11. The court also directed SEBI(WTM) to submit a status report, duly approved by Mr. Justice B.N. Agrawal, as expeditiously as possible, and also permit SEBI (WTM) to seek further directions from the Court, as and when, found necessary. Appeals are accordingly dismissed subject to the above directions.

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


Important observations of Supreme Court
 Sec 60 B (1) casts no obligation to issue information

memorandum (IM) . However Sahara companies chose to issue IM and invited public demand for OFCSD’s . Having filed IM, Sahara ought to have filed a final prospectus prior to opening of subscription lists  SC noted that although Sahara defended its action saying that issue of OFCDs is on a private placement but its action/facts were contrary to that stand  When such securities were offered to more than 50 persons and it is deemed to be a public offer in terms of section 67(3) . SEBI therefore gets jurisdiction as per sec 55 A (c)
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 34

 SC observed from the documents produced before it and

before the fact finding authorities do not show the relationship Sahara group had with the investors. But they has taken a declaration from the bond holders that they are associated with the company  SC arrived at a conclusion from the conduct and action of Sahara that the two company wanted to issue securities to the public in the garb of private placement to bypass the various laws and regulations in relation to that Court can in such circumstances, lift the veil to examine that conduct and method adopted by Sahara companies to defeat the various provisions of Companies Act and the provisions of SEBI Act  SC dismissed the appeal and upheld the orders passed by SEBI and SAT. It ordered Saharas to refund the amounts collected through RHPs dated 13.3.2008 and 16.10.2009 along with interest @ 15% per annum till the date of repayment.
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 35

Survey on Fraud in India -2010
As per The World Bank estimatebribes paid globally aggregates to over USD 1 trillion per annum• Key reasons in India-Obtaining routine administrative approvalsAttempts to win / retain business

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


Common Types of Fraud
             

Financial Frauds Manipulation, falsification, alteration of accounting records Misrepresentation or intentional omission of amounts Misapplication of accounting principles Intentionally false, misleading or omitted disclosures •Misappropriation of Assets Theft of tangible assets by internal or external parties Sales of proprietary information Causing improper payments •Corruption Making or receiving improper payments Offering bribes to public or private officials Receiving bribes, kickbacks or other payments Aiding and abetting fraud by others
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 37

Common Perpetrator
 Male –85%  Average Tenure < 5 Years –57%

 College Educated –38%
 Company Manager –52%  Age 31 to 50 –72%

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


Rationale for doing Fraud
        

Everyone else was doing it They can afford it I needed the money It was just a loan…I would have repaid it I felt used and wanted revenge I meant no harm and did no harm I did it to keep the business afloat Bribery is the norm in this type of business What I did was entirely appropriate for someone in my position  My employer didn’t compensate me well enough, so I took what was due to me
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 39

Who is Responsible?
 Board of Directors

 Senior Management
 Internal Audit  IT Department

 Middle Management
 Operational Management
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 40

How Management Encourages Fraud
 Responsibility, accountability and authority not established or

documented  Goals and objectives neither established nor monitored for success  No written policies or procedures

-low priority for the establishment of internal controls -no separation of duties -inadequate cash controls -documents -inadequate physical security for assets and records -no independent inventory of assets  Inconsistent application of policies or procedures -may result in unfair  treatment of employees -favoritism -low morale
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 41

What an Organization can do
 Tone at the top; create an ethical environment
 Lead by Example  Corporate Code of Conduct

 Call in Services for reporting unethical practices
 Reliable Internal Controls

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


What an Organization can do.. contd.
 Training Courses on  Ethics Training  Internal Controls  Fraud Prevention  Technological and business changes  Special training for monitors  Reference Checks on New Employees  Code of Sanction for Suppliers/Contractors
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 43

Adopt Anti Corruption & Anti Bribery practices as a process
 Assessment of specific corruption risks of the business.  Development of detailed anti corruption and bribery

  

policies . Implementation of the policies. Self monitoring of the effective implementation of the policies. Reporting on the policies and related programmes. Independent assurance of the effectiveness of these efforts.

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


Developing Code of Governance
 Working together with civil societies, government and 

  

private sector to develop and disseminate anti corruption messages Regional and international initiatives provide a forum for private sector, public sector, and civil society to come together with a common goal of reducing vulnerability to corruption Finally, attitudinal change is necessary By changing our thoughts, we can change our attitude and thereby change our behavior, which can change our lives The quality of our thoughts equals the quality of our lives Let us all work towards changing our attitude towards corruption.
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 45

 Lets say No to corruption..

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


Prevent -Fraud
 Strong ethical vale in the organization flowing from       

the top Recruitment process- Selection of right people at appointment Refence-chek and verification Defined policies and guidelines Clear role and responsibility Internal control system Transparency Commonsense
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National Voluntary Guidelines on Social , Environmental and Economic Responsibilities of Business July 20122- MCA

9 point formula

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


 1. Businesses should conduct and govern themselves

with ethics, transparency & accountability  2. Businesses should provide goods and services that are safe and contribute to sustainability throughout their life cycle  3. Businesses should promote the well being of all the employees  4. Businesses should protect the interest of and be responsive towards all stake holders, especially those who are disadvantaged, vulnerable and marginalized
Dr. Tabez Ahmad, http://corplexindia.blogspot.in 49

 5. Businesses should protect and promote human  

rights 6. Businesses should respect, protect and make efforts to restore environment 7. Businesses when engaged in influencing public and regulatory policy, should do so in a responsible manner 8. Businesses should support inclusive growth and equitable development 9. Businesses should engage with and provide value to their customers and consumers in responsible manner

Dr. Tabez Ahmad, http://corplexindia.blogspot.in


Dr. Tabrez Ahmad, http://technolexindia.blogspot.com

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